As consolidation at the top end of investment banking intensifies, in the mid-market it is only getting going. The recent joint venture between Cazenove and JP Morgan, and the proposed takeover of Durlacher by Lazardâs recently acquired Panmure, are the most obvious recent symptoms of this trend. They will also accelerate it.

Driven by economies of scale, cost problems and shareholder pressure, one by one the larger banks that have traditionally dominated the mid-market have retreated to focus their energy on competing for the most lucrative clients while running the minimum cost base possible.

The void has been filled by a rash of small new firms, often staffed by refugees from bigger outfits who have either been made redundant or who have decided that they don’t want to work for a global bank with 200,000 staff. This has given small and mid-cap corporates a genuine alternative for the first time in many years to employing the services of the B-team from a larger bank which doesn’t really want their custom.

However, there are two main problems with this burgeoning cottage industry. First, many of the smaller firms specialise in either securities or advisory work – rarely both. Second, to make the model sustainable, smaller advisers or brokers need lots of clients. The supply of clients could accelerate. JP MorganCazenove is not going to abandon its 200 or so small and mid-cap clients overnight, but in time it will naturally gravitate towards the top end.

This is likely to prompt a wave of consolidation – not only between smaller advisers or between brokers to add scale, but also across the two activities to create full-service mini-investment banks. Mergers such as Bridgewell, a small-cap broker, and Hawkpoint, a mid-cap advisory firm, or even Close Brothers and Numis, begin to make eminent sense.

At the same time, expect more deals like JP Morgan Cazenove and PanmureDurlacher. Far from being a U-turn by Lazard, the proposed spin-off of Panmure was planned all along. Financial News reported the spin-off plan in July 2004 – just a few months after Lazard acquired Panmure.

Lazard and JP Morgan have both recognised that their cost structure means they cannot afford to run full service small and mid-cap banking alongside their main business. Such clients can, however, be more lucrative than being the broker or adviser to a FTSE 100 client that doesn’t do very much.

If they can reap some of the benefits of providing a full range of investment banking services to smaller clients without bearing the full cost, joint ventures with smaller securities firms and advisers make a lot of sense. It is unlikely that Lazard and JP Morgan will be the last blue-chip names to team up with distinctly un-blue-chip smaller players.

THE ELEPHANT IN THE ROOM

With all eyes fixed on the impending fight to the finish between Deutsche Börse and Euronext for control of the London Stock Exchange, is it possible that people have not seen the other elephant in the room? As we report this week, several shareholders in Deutsche Börse have not only called for it to abandon what they see as a value-destroying bid for the LSE, but are also suggesting that it merges with its arch rival Euronext.

The natural reaction is to dismiss such a merger out of hand. Jean-François Théodore at Euronext and Werner Seifert at Deutsche Börse do not have the most cordial of relations, since Théodore was left standing at the altar in the 1990s when Deutsche Börse left the then ParisBourse in their proposed joint venture in derivatives. From an anti-trust perspective, the combination of Eurex and Liffe would create a domineering derivatives market, and a merger would put ownership of the two biggest clearing houses in Europe under one roof.

However, it would create the dominant eurozone equity market and accelerate the vaunted creation of a single European market, giving the LSE a run for its money. It would create a European derivatives champion in an increasingly global business. The question is whether Seifert would agree to separate Clearstream in exchange for the above.

Two other points count in the plan’s favour. Politically, both the German and French governments are pressing for greater Franco-German cooperation. And as a defensive move, both Deutsche Börse and Euronext could struggle if the other wins the LSE. The LSE has long insisted that it does not need to merge. The opportunity for a deal between the two continental Europeans has probably passed. But stranger things have happened.